About this Policy Research Brief Research Policy Brief 31

Asia has staged an impressive turnaround in 2009, but it is unclear

whether the recovery can be self sustaining even if the United States and
Europe fail to pull themselves out of the current recession. This policy
brief discusses the impact of the global financial crisis on emerging Asia
and seeks to articulate the rationale behind the policy changes and
reform necessary to return East Asia to the path of pre-crisis growth.

About the Asian Development Bank Institute (ADBI)

The Global Economic
The Asian Development Bank Institute (ADBI), located in Tokyo, Japan, is
a subsidiary of the Asian Development Bank (ADB). ADBI was
Crisis and Rebalancing
established in December 1997 to respond to two needs of developing
member countries: identification of effective development strategies and
improvement of the capacity for sound development management of
Growth in East Asia
agencies and organizations in developing member countries. As a
provider of knowledge for development and a training center, ADBI
serves a region stretching from the Caucasus to the Pacific islands.
ADBI carries out research and capacity building and training to help the
people and governments of Asian and Pacific countries. ADBI aims to
provide services with significant relevance to problems of development
Yung Chul Park
in these countries.

December 2009

Asian Development Bank Institute

Kasumigaseki Building 8F
3-2-5 Kasumigaseki, Chiyoda-ku
Tokyo 100-6008 Japan
www.adbi.org

ISSN: 1882-6717
The Asian Development Bank Institute’s (ADBI) research policy briefs are short, non-
technical pieces that summarize the key messages from ADBI research projects.
They are available online via http://www.adbi.org/publications/ and in hardcopy.

Asian Development Bank Institute

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Tokyo 100-6008, Japan
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URL: www.adbi.org E-mail: info@adbi.org

ISSN: 1882-6717

© 2009 Asian Development Bank Institute

The views expressed in this policy brief are the views of the author(s) and do not
necessarily reflect the views or policies of ADBI, the Asian Development Bank
(ADB), its Board of Directors, or the governments they represent. ADBI does not
guarantee the accuracy of the data included in this policy brief and accepts no
responsibility for any consequences of their use. Terminology used may not
necessarily be consistent with ADB official terms.
ADB Institute Research Policy Brief 31

The Global Economic

Crisis and Rebalancing
Growth in East Asia

Yung Chul Park

Yung Chul Park is a distinguished professor in the Division of International Studies, Korea
University.
1. Introduction
Since the beginning of the second quarter of 2009, Asia has
staged an impressive recovery. The People’s Republic of China
(PRC), Indonesia, Republic of Korea, and Singapore grew by an
average annualized rate of more than 10% and emerging Asia
should grow by more than 5% in 2009 (International Monetary
Fund [IMF] 2009). Asia has benefited from a strengthening of
domestic demand and exports, but the IMF (2009) has raised
doubts about whether the recovery can be self sustaining even if
the United States and Europe fail to pull themselves out of the
current recession. All Asian countries, including the PRC,
struggled with falling exports and stagnant domestic demand in
a global economy plunged into a state of extreme volatility and
uncertainty following the collapse of Lehman Brothers. To break
free of the crisis, they have implemented stimulus packages of
varying proportions consisting of increases in public spending,
tax cuts, and the expansion of credit at lower interest rates. To
return to the path of pre-crisis growth in East Asia, however,
these stimulus measures will need to be followed by and
combined with institutional and policy reforms that reorient
long-term growth such that it depends more on domestic
demand. The purpose of this policy brief is to articulate the
rationale behind these policy changes and reform.

0 2 | The Global Economic Crisis and Rebalancing Growth in East Asia

2. Relative Economic Performance
Across Countries in Asia

The severity of the impact of the crisis has varied from country to
country. The PRC and most of the Association of Southeast Asian
Nations (ASEAN) member countries have been holding up much
better than some of their neighboring countries and are likely to
register positive growth in 2009. In contrast, Japan and Asia’s
newly industrializing economies have been hit hard by the crisis.
None of these countries are forecast to realize positive growth in
2009 and the group of Asian newly industrializing economies is
expected to see a contraction of 4% of their combined gross
domestic product (GDP) (IMF 2009). In general, a high degree of
export dependence, dominance of manufactures in exported
products, and openness of domestic financial markets are shown
to have accounted for the differences in the impact of the crisis
and the relative importance of crisis contagion.

3. Crisis Management:
Stimulation of Domestic Demand

In stimulating domestic demand, Asian countries have lowered

interest rates and improved the availability of credit, but these
measures have proved to be of limited effectiveness for
economies in a liquidity trap.1 This perception of ineffectiveness

1 The term liquidity trap is used to refer to a situation where the demand for money becomes
infinitely elastic.

The Global Economic Crisis and Rebalancing Growth in East Asia | 0 3

has driven policymakers to rely more on fiscal measures, such as
cutting taxes and increasing spending on public works projects,
as the prime instruments of the stimulus. The PRC, Japan,
Republic of Korea, and Malaysia have all implemented large
fiscal stimulus packages, but there are indications that these
expansionary macroeconomic policies may not be sufficient and
that they will have to be fortified further to ensure that Asian
economies do not fall deeper into recession if the recovery of the
American economy stagnates.

In managing fiscal policy, the authorities will first need to

estimate the magnitude of multipliers of government spending
and tax cuts, which, according to recent studies (IMF 2008;
Barro and Redlick 2009), tend to be small, and then use these
estimates to formulate a variety of public expenditure programs
and tax reductions to enhance stimulus packages with a
minimum of administrative lag. At the same time, public
spending programs will need to be chosen not only for their
short-term expansionary effect, but also in terms of their ability
to contribute to long-term improvements in total factor
productivity. Even if the countercyclical effects are strong, fiscal
stimulus could be counterproductive in the long run as it could
raise the real interest rate, mask structural weakness, and
postpone much needed structural reforms. Furthermore, in the
short run, Asian policymakers are well aware that, for their
export-oriented economies, there is a limit to the extent to which
expansionary monetary and fiscal policy can fill the void created
by the decline in external demand.

0 4 | The Global Economic Crisis and Rebalancing Growth in East Asia

4. Rebalancing Growth: Ensuring
Neutrality of the Incentive System

To sustain robust, long-term growth in Asia, the above-

mentioned short-term measures need to be carried out in
parallel with institutional and policy reforms that will usher in a
new development strategy that focuses on internal demand as a
source of growth. This is because, with the global economy in
deep recession and the rise in trade protectionism, the region
cannot export its way out of the crisis. Even when the global
economy recovers and financial stability is restored, it may no
longer be viable to return to the pre-crisis export-led strategy
(Asian Development Bank 2009).

Throughout Asia, there is an emerging consensus that the short-

term stimulus packages should be viewed as the first step toward
achieving the goal of rebalancing growth, the key to surviving the
global economic crisis. In this policy brief, rebalancing is defined
as the process of removing the bias against the non-tradable
sector. Countries adhering to an export-led growth strategy are
likely to maintain internal terms of trade that are in favor of
tradables. In such economies, the relative prices of tradables are
kept at artificially higher levels so as to induce the allocation of
resources to export-oriented industries. Rebalancing growth will
require the elimination of this structural bias so as to facilitate
the allocation of more resources to the non-tradable sector. To
this end, it is necessary to wind down the incentive schemes for
export promotion that often include tax breaks, preferential
lending, and other explicit and implicit subsidies to exporters.
The Global Economic Crisis and Rebalancing Growth in East Asia | 0 5
In embracing a rebalancing strategy, distinctions should be made
between an export-led growth strategy and export-led growth.
The former is a strategy in which the underlying incentive
structure is biased in favor of exports; this is not the case for
export-led growth. Because of comparative advantage and other
structural characteristics, some market-oriented open economies
may rely more on external demand for growth than others, even
though their incentive schemes are neutral, and they may run
either deficits or surpluses on their current accounts.2 With the
exception of the PRC, most East Asian export-oriented economies
have phased out the subsidization of exports, including keeping
the currency undervalued, and as such they may be classified as
export-led growth countries with relatively neutral incentive
schemes (Blanchard and Giavazzi 2006).

Since the 1997–1998 Asian financial crisis, weak investment has

been one of the major causes of slow growth in non-PRC Asia.
Stimulating domestic investment will therefore need to be a top
priority for rebalancing growth in the region, in addition to
consumption expansion. While reviving investment is critical, it
will also have to be managed in a way that will refocus the
allocation of investment away from export-led industries and
toward the non-tradable sector, improving social welfare
education, health care, and the pension system, and protecting
the environment. In this regard, the adoption of a low carbon
and green growth strategy will help protect the environment and
also help boost the domestic demand for a variety of new services
that a green growth strategy is expected to generate.
2 The ratio of exports to GDP is close to 60% in the Netherlands and about 40% in the Republic of
Korea. No one would argue that the Netherlands is a country pursuing export-led industrialization.

0 6 | The Global Economic Crisis and Rebalancing Growth in East Asia

5. Adjustment of Propensity to Save

In view of the high rates of saving and relatively neutral incentive

schemes in emerging Asia, one may conclude that the bulk of
Asia’s current account surplus does not come from Asia’s
exceptional success in pushing out exports as much as it does from
a high propensity to save and stagnant investment demand.
Growth rebalancing should therefore be geared to removing
structural impediments to consumption and investment. Such a
rebalancing strategy would help improve the allocative efficiency
of the economy, while making it less vulnerable to external shocks.
The high rate of saving has long been regarded as one of the
virtues of East Asian societies. Among Asian countries, the PRC’s
savings rate has been exceptionally high—close to 50% of
GDP—and has exceeded investment, thereby generating a current
account surplus year after year (Horioka and Wan 2008). The
savings rates of other countries are lower and, in fact, declining,
but are still high enough to produce current account surpluses.
People in Asia save more than people in other regions not
necessarily because they are intrinsically frugal or that they live in
cultures that greatly value saving, but that, as a number of studies
have shown, in many cases they are forced to save more because of
the poor quality or nonexistence of such vital services as public
health care, education, and social security that have long been
institutionalized in western societies. Another contributing factor
is their inability to smooth their consumption over time through
borrowing from and lending to financial institutions and markets.

The Global Economic Crisis and Rebalancing Growth in East Asia | 0 7

Rebalancing growth therefore entails policy changes and
institutional reform that would eliminate structural
impediments that constrain households to save more than their
counterparts in advanced countries. Although there is a vast
literature on saving behavior in emerging economies, variables
that are closely associated with changes in the propensity to
save tend to differ from country to country. In terms of the
rebalancing strategy, some of the reforms that would help induce
households to consume more as a proportion of their income
include: (i) the establishment of an efficient system of social
protection; (ii) the expansion and improvement of the efficiency
of public and private pension, public health care, and education
systems; (iii) the phasing out of restrictions on consumer credit;
and (iv) the creation of financial institutions specializing in
household lending.

6. Regional Cooperation for

Policy Coordination

Asia’s policymakers all emphasize the need to stimulate

domestic demand and, to further this aim, the need to improve
the effectiveness of regional policy coordination for crisis
management. To this end, Asian countries must avoid the
collective action trap. Unless all countries in the region join in a
simultaneous expansion of domestic demand, the expansionary
policies of some individual countries will not add substantially to
regional aggregate demand. For more than ten years since the
1997–1998 Asian financial crisis, the member states of
0 8 | The Global Economic Crisis and Rebalancing Growth in East Asia
ASEAN+33 have discussed the establishment of a modality of
and institutions for mutual assistance and policy coordination at
the regional level. They have yet to make significant progress in
creating a workable scheme for policy coordination because of
the failure of the PRC and Japan to provide leadership for
regional cooperation.
3 An East Asian regional arrangement for economic cooperation among the ten countries that
comprise ASEAN, plus the PRC, Japan, and Republic of Korea.

References
Asian Development Bank (ADB). 2009. Asian Development
Outlook 2009: Rebalancing Asia’s Growth. Manila: ADB.
Barro, R., and C. Redlick. 2009. Macroeconomic Effects from
Government Purchases and Taxes. National Bureau of
Economic Research (NBER) Working Paper 15369.
Cambridge, MA: NBER.
Blanchard, O. J., and F. Giavazzi. 2006. Rebalancing Growth in
China: A Three-Handed Approach. China and World
Economy 14(4): 1–20.
Horioka, C. Y., and J. Wan. 2008. Why Does China Save So
Much? In China, Asia and the New World Economy, edited
by B. Eichengreen, C. Wyplosz, and Y. C. Park. Oxford,
UK: Oxford University Press.
International Monetary Fund (IMF). 2008. World Economic
Outlook Update: Rapidly Weakening Prospects Call for
New Policy Stimulus. Washington, DC: IMF.
———. 2009. World Economic Outlook: Sustaining the Recovery.
Washington, DC: IMF.

The Global Economic Crisis and Rebalancing Growth in East Asia | 0 9

About this Policy Research Brief Research Policy Brief 31
Asia has staged an impressive turnaround in 2009, but it is unclear
whether the recovery can be self sustaining even if the United States and
Europe fail to pull themselves out of the current recession. This policy
brief discusses the impact of the global financial crisis on emerging Asia
and seeks to articulate the rationale behind the policy changes and
reform necessary to return East Asia to the path of pre-crisis growth.

About the Asian Development Bank Institute (ADBI)

The Global Economic
The Asian Development Bank Institute (ADBI), located in Tokyo, Japan, is
a subsidiary of the Asian Development Bank (ADB). ADBI was
Crisis and Rebalancing
established in December 1997 to respond to two needs of developing
member countries: identification of effective development strategies and
improvement of the capacity for sound development management of
Growth in East Asia
agencies and organizations in developing member countries. As a
provider of knowledge for development and a training center, ADBI
serves a region stretching from the Caucasus to the Pacific islands.
ADBI carries out research and capacity building and training to help the
people and governments of Asian and Pacific countries. ADBI aims to
provide services with significant relevance to problems of development
Yung Chul Park
in these countries.

December 2009

Asian Development Bank Institute

Kasumigaseki Building 8F
3-2-5 Kasumigaseki, Chiyoda-ku
Tokyo 100-6008 Japan
www.adbi.org

ISSN: 1882-6717